Originally created 02/14/98

Two of "Big Six" say they won't merge



NEW YORK -- KPMG Peat Marwick and Ernst & Young said Friday they have scrapped plans to merge and become the world's biggest accounting firm, citing reviews by antitrust regulators concerned about reduced competition in the industry.

But some industry experts were skeptical of the reason given by the two firms, and suggested that a culture clash as well as opposition to the deal from their foreign partners -- who felt they had less to gain -- doomed the marriage.

The deal, coupled with a pending merger between Coopers & Lybrand and Price Waterhouse, would have cut the big six accounting firms to four.

The deals worried antitrust watchdogs in several countries because just two firms would have wound up with auditing responsibilities for more than half of the U.S. publicly traded companies.

The KPMG-Ernst & Young deal was under scrutiny by regulators in the United States, Europe, Japan, Australia, Canada and Switzerland.

And opposition to the merger has been mounting. Just last week, the European Union extended its investigation of the deal, which was announced in late October.

The two companies said they scuttled the merger because the reviews by regulators "would have taken many months, incurring considerable costs and potentially considerable disruption to client service." Not to mention the possibility of different decisions by the various countries.

"The regulatory issues, together with the costs and resources required to merge the cultures of the two firms, have made the proposed merger impractical," the companies said in a joint statement.

The deal would have created a company with annual revenue of $18 billion, ranking it No. 1 ahead of a combined Coopers & Lybrand and Price Waterhouse with $13 billion.

Industry observers noted that since the merger was announced, only the U.S. partners of the two firms have voted for it -- suggesting that their overseas colleagues had delayed their vote because they were unwilling to jump on board.

"They didn't see benefit enough for themselves to join in on this," said Arthur W. Bowman, editor of Bowman's Accounting Report, an industry newsletter in Atlanta. "They couldn't get all the egos around the world to agree to compromise."

Mr. Bowman said regulators most likely would have approved the deal with some restrictions. He said it also was difficult to believe the two accounting firms, which advise other companies on mergers, didn't consider the costs and other problems from regulatory reviews when they entered the deal.

Meanwhile, Coopers & Lybrand and Price Waterhouse issued a joint statement saying their merger was on track and they believe it will win approval from regulators.

"We knew that the regulatory process would be a long and arduous one," the statement said. "We are prepared to work with the regulators to get our merger approved."

The accounting giants were rushing to combine their businesses to attract clients by having a bigger global presence and more comprehensive services.

As their corporate clients merge or expand worldwide, the companies felt they would be in a position to serve them better with greater reach and expertise.

But regulators feared a consolidation of four of the top six accounting firms, creating two powerful firms, could hurt competition and undermine the integrity of independent auditors who review corporate financial statements.

Big Six

A look at the Big Six U.S. accounting firms, ranked by annual revenue.

  • Arthur Andersen & Co., 52,000 employees, 78 countries, $11.3 billion revenue.
  • Ernst & Young, 72,000 employees, more than 660 locations, $9.1 billion revenue.
  • KPMG, 78,000 employees, 150 countries, $9 billion revenue.
  • Coopers & Lybrand L.L.P., 74,000 employees, 142 countries, $7.5 billion revenue.
  • Deloitte and Touche Tohmatsu, 79,000 employees, 129 countries, $7.4 billion revenue.
  • Price Waterhouse, 56,000 employees, 119 countries, $5.6 billion revenue.